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Renewable and distributed energy opportunities in the mid-Atlantic

INDUSTRY LEADERS ROUNDTABLE DISCUSSION Solar Energy Industries Association, Washington D.C. Sullivan & Worcester partnered with the Solar Energy Industries Association (SEIA) in November to co-host a roundtable discussion exploring renewable and distributed generation opportunities in the mid-Atlantic region. The panel was comprised of industry experts, including Commissioner Anne Hoskins from the Maryland Public Services Commission; Dana Sleeper, Executive Director of the Maryland, D.C. and Virginia regional chapter of SEIA; Anmol Vanamali, Financing Strategies Director at the D.C. Sustainable Energy Utility; Bracken Hendricks, President and Chief Executive Officer of Urban Ingenuity; and Rick Moore, Chief Operating Officer of Washington Gas. Welcoming remarks were provided by Rhone Resch, President and Chief Executive Officer of SEIA, and the panel was moderated by Elias Hinckley, Chair of the Energy Practice at Sullivan & Worcester. Following are excerpts of the transcript from the roundtable discussion. 26 EDGE Finance Advisory / May 2016 As we talk about distributed generation, we should also talk about a slightly broader concept: what we’ve been terming distributed impact. Distributed impact is a real combination of distributed resources, across different fuel types and different technologies to really deliver a broad range of benefits in this space. MR. HINCKLEY: Anne, you sit on the Public Service Commission. It must be a fascinating time to hold this job, as there’s a ton of transition going on. Around the country, we see really significant efforts to rethink what the role of the utilities should be. Can you give us a little perspective on your role and how you’re engaged in this process with the Commission? MS. HOSKINS: Sure. And thank you. I just have to be clear these are my own opinions and I am not speaking on behalf of the Commission. The Maryland Public Service Commission has been very active in advancing new technologies, new approaches to energy efficiency and distributed energy for a number of years. That said, we’re not the commission that you’re going to read about in SNL or in one of the other dailies as having a large comprehensive distributed generation proceeding right now. Instead, I think the approach the Commission has taken has been to focus on different elements of what will eventually make up this distributed system. Probably the area that we’ve been the most in front of has been energy efficiency. I’m really interested to hear about the different approaches that have been taken in the District, but Maryland has had very aggressive goals for energy efficiency and demand response. So I’d say we focus quite a bit on energy efficiency. We just re-upped those goals and now have some of the more aggressive goals in the country. On the renewable side, we have a renewable portfolio standard and we have metering. I don’t think we’ve hit the types of penetration levels that I would like to see in Maryland. We are supposed to be receiving a proposed rule from the Commission’s technical staff on the community solar initiative and I believe some of you are probably involved in that and I’m looking forward to seeing that proposed rule. MR. HINCKLEY: Fantastic. Thank you. Dana, you’re on the frontlines advocating for state and local policies to make this market work. Can you tell us a little bit about your approach and how you’re working to keep the market durable? MS. SLEEPER: Sure. So MDV-SEIA, as you know, is a regional trade association and what we do is bring our members together on state level committees and discuss with them what is going to be most effective in growing their businesses. If there is a particular policy that we’ve seen that’s successful in other states, we discuss the merits as it might apply to, for example, the Maryland market. Then through a 27 certain determination process through the committee, we elect to pursue certain priorities. So, for example, we’re looking at removing the cap on PACE (property assessed clean energy) financing in Maryland this coming session because there’s a lot of interest in PACE programs and the cap for commercial systems is something that’s been burdensome in development. We look at those specific types of policies, analyze the situation, and then move forward with our legislative agenda. MR. HINCKLEY: Thank you. Anmol, DCSEU is, to me, a little bit of an unusual entity or program. I’m familiar with it but I suspect that not a lot of people in the room really understand what it is you do and why. If you could give us a little background on that and the relationship between the Vermont Energy Investment Corporation and the District, I think that would be very helpful. MR. VANAMALI: Absolutely and thanks again for inviting me to speak. And when it comes to the opinions, they will be mine and not representative of VEIC or our client base in the District. So the DCSEU in its most basic form is a public benefits program that exists in many parts of the country. The Vermont Energy Investment Corporation is a contractor that manages this contract. We won this contract in 2010, and 2011 was the first implementation year. A surcharge on the ratepayers in the District gets pooled into the sustainable energy trust fund which is managed by the District, and in turn funds the DCSEU. MR. HINCKLEY: Thank you. Bracken, you’re developing a microgrid at the old Walter Reed site. You’re also the program administrator for PACE here in the District and I know you’ve got some other things that fit underneath your umbrella. Give us a little bit of a sense of why this market and why now. MR. HENDRICKS: Yes. What you just described are two things that actually sound quite different in terms of business lines. One is really focused on project development, making microgrids work. About making distributed energy a viable capital investment, and a viable project development opportunity for folks whose core business is just to do bricks and mortar transactions. The PACE program, which we operate on behalf of the District’s Department of Energy Environment – which was newly-rebranded to elevate the role of energy, which we really like – is about program administration. Again, it’s about helping to move capital into projects that are viable. I just want to step back for one second and comment on the structure of this panel. There’s the old proverb about lots of different wise men touching an elephant. One’s touching the ear, one’s touching the tail, one’s touching the skin. They’re all describing something different, but it’s all the same elephant. We’ve got regulators. We’ve got very large utility companies. We’ve got advocates, start-up businesses, government programs. And we’re all looking in at something very fundamental that’s happening in the D.C. market. This is a very deep systemic change not only in the regulatory framework or the nature of the systems that we’re building, but also a change in the fundamental strategic infrastructure underlying the entire economy. Over the past decade or so, we’ve seen a complete transformation of telecommunications, the ICT (information communications technology) revolution. Now in energy, we’re seeing new thinking about data systems, about management of the flow of information to access substantially new productivity, efficiency, and economic value, in the physical environment. The movement from what really has already happened with telecom and with data systems is now happening in the real economy, including energy. If you think about that change, what we’re doing is really pushing data-enabled networks into the physical economy in a pretty fundamental way. That’s what a microgrid is. You’re pushing energy development out to the source of use and – for the first time – we’re starting to manage energy efficiency as if it was a deployable, dispatchable resource. It used to be that energy was a commodity that was produced and put out on to wires with no visibility and then wasted 28 EDGE Finance Advisory / May 2016 at the endpoint of use. Now we have this multidirectional communication which is opening up markets in a very, very fundamental way. I was especially impressed by what Rick said and what WGL is thinking through. Here, you’ve got a hundred-yearold utility in the heart of the community that is used to operating in a commodity market. And they’re moving into a market where they’re trying to deploy capital intelligently into innovative technology-led projects – and they’re trying to actually change what is the product that they’re delivering. And reflecting on what Anne was saying about the regulatory environment, we now have to regulate differently for a new product in a changing market. All of us, with our own little slice of this, are struggling to figure out how to actively engage in something that’s changing in real time. MR. HINCKLEY: I think you really hit on something. We are right in the middle of an inflection point and a transition. It brings me back to something we had talked about a couple of days ago: when we think of the old grid and its purpose, it was a stable grid that provided universal service that allowed the cheapest possible centralized model. Now we’re fundamentally changing that. We have to rethink what the goals of our energy infrastructure are. You’ve actually done some interesting thinking around this notion of what should those goals be as we go forward. MR. HENDRICKS: If what I said is true, that we’re actually changing the operating system for how energy works in the economy, then I think it’s really useful to go back to what got us here because the existing grid is this huge success story. So let’s go back to rural electrification. It was a really hard business challenge to push capital investment those last miles into rural communities and figure out how to pay for all that copper wire. How do we actually make this work as a business proposition? Well, we developed a whole utility regulatory framework and we developed federal policies and state and local policies predicated on economic development. We pushed billions of dollars into capital investment that made the U.S. economy the beacon of middle-class success stories and small town economic growth that rested on electrification of communities. And so what were the goals that created that success story? Universal, reliable, affordable, safe energy, right? You can tick down that list of goals and check each box. We have occasional blackouts, but if we don’t have electricity for a couple days we’re up in arms because we’re so used to that reliability. If we’re now building an energy network that rests on these distributed energy systems, including microgrids and residential solar feeding back into the grid helping to build reliability, voltage control and other ancillary services, well, now, you’ve got other benefits that need to also be managed through regulatory proceedings. And this is why public service commissions and the old regulatory framework are at the heart of this. So you need transparent markets, right? So we need to have two-way visibility on data systems. You need resilience. What happens in a world where climate change is real and where infrastructure is being impacted by weather? How do we deal with those resiliency issues? It also raises tremendous issues of privacy. If my data is fundamentally part of the market but it also is my own personal data, what are my consumer protections? That raises a whole set of security issues – national security and personal security – that are related, as well. And then how do we put the low carbon energy on? I think clean is something that we’re used to thinking of as a constraint put on the grid but low carbon energy is fundamental. So how do we make solar succeed? How do we make distributed renewables a fundamental part of the business model so it’s pro-business to make clean energy part of these new networks? And I think each of us in our own way is really chipping away at pieces of that goal-setting. MR. HINCKLEY: Anne, Bracken hit on a few different value concepts which are not traditionally built into how we think about setting the price for power in a regulated environment. How is that being addressed within the confines of the Public Service Commission now, and do you see that really taking on a quantifiable value as we go forward – things like resiliency, security, reliability? MS. HOSKINS: I think that certainly you made a lot of good points there. One recent proceeding that we had, which is an example of the types of proceedings that I think a broader constituency should start participating in, is our reliability proceeding. 29 We have a rule (RM 43), which came out of the experience many of you probably had with the derecho storm a couple of years ago and concerns about reliability and resilience. The Commission spends a tremendous amount of time, based on the legislative mandate, developing metrics to improve reliability. In those metrics, we are very focused on reducing the time and frequency of outages. One opportunity which really has not made its way into that proceeding is to understand how else we can improve reliability as we go forward. We will set metrics, which I think commissions are very good at doing, such as setting data points or specific rules. But what seems to be missing in some of our proceedings are the more forward-thinking concepts of what different approaches should we take to get to that next level of metric. Now when we’re in this reliability proceeding, clearly, we are required to look at costs. One of the challenges, as you look at the concept of performance rate-making, is that as we look at all these metrics we need to be very clear about what our objectives are, what the trade-offs are. Then we need to hear from different voices. If I could leave any kind of message today, it is that, even if the commission doesn’t have a utility of the future proceeding or a REV-type proceeding, a lot of these issues are making their way into other standing proceedings. In our case, it might be through our EmPOWER proceeding, our reliability proceeding, or rate cases, which we have quite frequently at this time. I know it’s difficult to participate in all of these, but all of these different issues are coming up in these different kind of stovepipe proceedings and we need help by hearing from different voices to figure out what those metrics should be. MR. HINCKLEY: Absolutely. That’s a lot to manage. Rick, I want to do a little more level-setting as we get ready to dig a little deeper into the opportunities out here. You are not exclusively focused on solar. I know you’ve got some microgrid possibilities in your development plans. Can you talk a little bit more about the breadth of technology that you’re deploying in this distributed end-use market? MR. MOORE: Sure. We think about having a diverse set of solutions and offerings as a way to serve our customers’ needs and trying to address holistically their energy issues or energy desires. One technology actually Anne and I were talking about over breakfast is fuel cells. At our own facility in Springfield, we have a LEED gold building. It’s an interesting, I think, representation of how sustainable design can actually result not only in the environmental benefits of the LEED certification but also improve the quality of work life for your employees. We have a Bloom Energy server deployed in our office there in Springfield. That fuel cell technology continues to gain momentum in the market and has strong support from WGL as we work with a number of providers to bring that kind of technology to the market. Besides solar PV, we also are deploying solar thermal, and even have deployed some combination solar PV/thermal on residential properties on the West Coast, which is another interesting product. 30 EDGE Finance Advisory / May 2016 We also do energy management. So we use software to help companies manage their energy spend and benchmark their energy use against industry standards. This also helps them compare across their own facilities how and when they’re using energy in their larger facility footprint. We are also continuing to look at energy storage. We’ve been involved in the energy storage market for some time but primarily as just an actively interested party. Now I think we’ve really turned the corner to look for tangible opportunities to deploy capital to stand-up storage. We’re working with a number of smaller companies. We’re talking to the big manufacturing companies. We’re looking across the U.S. at the various geographies where solar storage works, primarily behind the meter. Although we are a utility, we’re not an electric utility. So on-grid storage isn’t really our primary focus. Rather, it’s behind the meter storage for individual customers. We’re looking at wind investments. We’re looking at biogas. We’re looking at waste-to-energy. We provide a carbon offset product. So that’s what is in our stable at the moment. We continue also to look at and work with other companies. I’m involved personally with a couple of energy incubators here in D.C. and also elsewhere. Their goal is to really identify real, ready-for-market products that are not currently being utilized but can be and should be as part of an all of the above energy strategy. What has been touched on so far is really this combination of a customer desire but also a framework that allows all technologies, not to be in competition with each other, but actually to work together to deliver all the benefits that we can for our customers and also our communities. MR. HINCKLEY: Dana, programmatically, D.C. and Maryland have a really progressive set of policies compared to most of the rest of the country. But as I look at these markets, they’re warm but not nearly as red hot as some other markets. I’m wondering if you’ve got a thought on what the hold-back is in these markets. MS. SLEEPER: Yes, Maryland and D.C. are great examples of East Coast progressive markets. They have public service commissions and legislators who are very interested in progressive policies and looking at renewable energy. That said, they’re not necessarily as progressive as, say, California. That’s just the reality. As Anne mentioned earlier, Maryland errs on the side of addressing specific issues rather than a holistic approach. So we might not see some massive piece of legislation in Maryland, saying we want a 50% RPS and all these other components as part of that. Rather, they tend to look at specific items, like community solar, and study that and understand what the implications of such a program would be. In doing so, they take more incremental steps towards a renewable energy future. There is a lot of development here and one of the things that a lot of the companies like in our region is the fact that it’s not a boom-bust market. It’s a very steady market. It’s predictable and that’s something that’s been very helpful for companies looking to grow in the region. I don’t necessarily see it as a bad thing. I think that we’re going to eventually reach that scale but we’re just taking slower steps to get there to make sure we do it the right way. 31 MR. HINCKLEY: Rick, thinking about this market compared to other markets around the country, I have a two-part question. First, what is it you’re looking for as an investor or a longterm owner of energy assets? Is it strictly a return-driven analysis or do you have a broader mandate? Second, in looking at the D.C., Maryland and Virginia marketplace, what do you see as the restrictions or limitations on your enthusiasm for investment here? MR. MOORE: Answering the first part, as an investor, we distinguish ourselves a little bit from the traditional investors in, let’s say, solar as the example. We are an energy company, looking for energy investments. We are looking to be long-term owners of energy-delivering assets. Folks in the market can talk about 10, 15 or 20 years as a long-term contract. Well, for us as a company 20 years is just not that long. It is our intention to serve our customers for at least that long and certainly well beyond that. So we can be patient investors. When we enter a project as an investor, we’re not looking for that first couple of years and an exit. We’re looking to be participants in the life of that asset and to be involved with our customers for that entire time. Also, as an energy investor, although we deploy our tax equity, we are not “tax equity investors.” We’re not looking solely for the monetization of rebates like the ITC, etc. Certainly that’s a part of the financial component of the deal, but our interest is to leverage all available opportunities to make deals work for our customers and for our company. We really look at these projects as energy projects – not as alternative energy projects, not as tax advantaged projects. These are energy investments, investments that we have been making, we are making, and we will continue to make. AUDIENCE QUESTION: Distributed generation and distributed energy are also tied in to de-carbonization and we have some strict climate goals that we are looking to meet within the next few years – and, as you mentioned, that isn’t a long time. How does the mainstreaming of climate mitigation and adaptation tie into what we’re talking about here today? MR. HINCKLEY: I think you hit on a great point. This goes to some of what Bracken was laying out. Bracken, when you go out and talk to your investors and try to explain your vision, when you bring up things like climate, how do you frame that and how is that received? MR. HENDRICKS: Right. And these two questions side-by-side are very interesting because one is talking about a very large overarching policy-driven goal but then the question is how do you actually get there and how do you build the project. Having that policy certainty is certainly helpful, but what we’re talking about is project-level investment – it’s project finance. How do you deploy capital into a project knowing that you’re going to have stable cash flows on a predictable timeframe? One of the biggest challenges for us on the microgrid side has been putting together a project that’s truly financeable. The problem is not the absence of capital; there’s plenty of money circling in the U.S. economy. That money will flow to sensible projects. Policy measures like the ITC create a stable flow that improves the return for these asset-level investors and it helps make the deal pencil. At the end of the day, to achieve these carbon- and climatedriven goals, you have to translate them into transactions that pencil. You mentioned the Walter Reed project. We were involved in helping a base-closing project. There was a competitive bid. A group of developers won the master development contract but, at the end of the day, they were real estate developers and they wanted to invest with a very specific risk profile in a very specific kind of asset. It was real estate. They knew how to deal with first costs. They knew what business they were in and how to manage the cost of building buildings. They didn’t want to own a 20 or 30 year asset that’s producing these lovely cash flows from selling energy. They’re not a utility company. They’re real estate developers. We had to conceptually translate a clean energy project into a sensible layer in a larger real estate development. Then we had to look at what are the technologies, what are the capital solutions, and how do you structure it to bring in an outside investor who isn’t a real estate developer but rather a company that wants to invest in long dated energy assets with very stable and predictable cash flows? 32 EDGE Finance Advisory / May 2016 We brought in folks who were used to developing cogeneration projects. A lot of them looked at it and they said, “eh, it’s a small cogen project.” Then others looked as it as an optimization for thermal energy. But it had only a small group of customers and a small thermal load so it wasn’t that interesting. But then when you started to layer in all these ancillary benefits to the grid – maybe we could monetize these ancillary services, maybe you could bring in solar and layer in large capital investments and get the benefits of the ITC, etc. You start stacking all of these sorts of benefits. Then you look at how to crush the cost side. Now you have a project that pencils and suddenly it makes sense to an outside investor. And the real goal is to bring in a long-term investor – and hopefully there will be some announcements there soon, and hopefully there will be more and more in Washington, D.C. MS. HOSKINS: Certainly in Maryland, the climate goals that were set a few years ago ended up being very important policy drivers that helped support the eventual legislation and regulations that came after that. It’s a very important construct for us to be working under because that supported why we would be expanding our energy efficiency goals. It supported why the RPS was important. And the new Administration in Maryland has also just stated its continued commitment to these climate goals. We see it in our energy efficiency proceeding. One of the issues in our last set of hearings on the subject was how do we analyze whether energy efficiency is effective. There’s a lot of debate around what the tests should be. One of the tests is the societal benefits test, which takes a broader view. We as a Commission did adopt the use of the societal benefits test as one of the metrics to look at when we’re trying to decide has this retrofitting or have these audits made a difference. So from my experience, those goals are much more effective than some people think. They help us stay focused on what the rationale is for all these initiatives. MR. VANAMALI: And I was going to quickly add that one way to align all our objectives with our climate goals is to marry climate goals with the price of carbon. So that way, when Bracken goes and tries to sell his green microgrid, he doesn’t have to make the moral case for it necessarily. There is a clear revenue stream that comes from selling the carbon credits. MR. HINCKLEY: I want to refocus on investment, both in terms of the way you’re pursuing projects but also how you’re communicating this to investors. What we’re talking about is the distributed market. These are small projects but they are often just as complex to execute as large projects. And there’s not nearly as much room in there to solve that complexity. We spend a lot of time thinking about the process improvements or the standardization process that we can bring to the table to help get these deals done, including for example pricing portfolios on a per-watt basis. But I’m curious, how do you address this fundamental shift in your approach to the energy marketplace? For big infrastructure projects, it didn’t really matter what a lot of those transactional pieces were because you still had plenty of room to get to that return. In an energy marketplace that is much more fragmented, is it difficult to work through on a bit-by-bit basis? MR. MOORE: The key to that, as you described it, is there really needs to be a process and a function in your company to be able to evaluate and pursue projects or a large number of smaller projects. We’ve built that capability, leveraging some of the skills we have already. For example, in the retail market space, we have a credit evaluation process and a team. So we can bring that experience to try and more rapidly and comprehensively assess a series of small C&I solar projects, for example. We also balance the evaluation of all those technologies and projects by having a diverse portfolio. By having 33 different types of projects, we spread our portfolio across a number of segments, so we’re not, for example, solely weighted in solar. On the transaction costs, at least in solar – small and medium C&I – we have standard paper now. Specifically, these are EPC criteria and components of an EPC. We’ve got a standard PPA. These documents are open-sourced, they’re not proprietary. We’ve developed them over time and released them to the market. Now we’re even seeing developers come back to us with our own paper, saying, “hey, would you be interested in a project that looks like this?” And we say, “yes, we really like the look of that paper.” That is really helping us to drive down the transaction costs. Like anything else when you start to build the function and you start to build the experience, then you just start having that comfort and capability to drive a larger number of projects through your funnel. I think it’s really required. It would be very difficult to recreate documentation for each – for example – small ground mount solar for an individual customer in a geography you’ve never been in before where you need to identify all of the components of the state incentives. If you’re driving that for every project incrementally, that’s a very, very difficult way to run a business. MR. HINCKLEY: Bracken? MR. HENDRICKS: May I just jump in? This whole question of aggregation is huge and it’s fundamental to building a market. We already have a lot of functioning markets that already do this. One of them is the real estate market. You have billions of dollars flowing through tiny decisions every day. One of the things that the D.C. PACE program (that Urban Ingenuity runs) and the DCSEU are trying to do together right now is create an integrated program for boiler replacement. People are investing in new boilers every day. The question is how do we get some good incentives out there and get information to the point of crisis when there’s a pain point. At the end of the day, as climate-motivated as a building owner may be, they’re not necessarily going to think to swap out a $500,000 system in their apartment building based on climate. However, there’s this one moment when they’re nearing the point of failure, when you can have a massive impact on that half-million dollar investment. If you do that 20 times, suddenly you’re starting to have meaningful scale and you’re aggregating. Another place where this kind of aggregation has happened very successfully over the last 20 to 30 years in the U.S. economy is in affordable housing. There’s this tremendous market that’s massively underserved. We have things like 34 EDGE Finance Advisory / May 2016 the Community Reinvestment Act. We have incentives that recognize a public good in making sure that low-income people can actually live in quality housing. You have little tax incentives and all these other incentives available and you have a whole industry where people layer lowcost debt, different sorts of subsidies and they put these projects together and they work. MR. HINCKLEY: Anmol, you’re trying to solve in a lot of cases what have historically been treated as unsolvable problems in trying to penetrate some parts of the market that just don’t fit these traditional finance models. And you do this on a fairly tight budget. How do you do that? MR. VANAMALI: Discounted legal rates help. (Laughter.) I’m kidding. You hit on a great point. Scale and complexity are especially acute when you’re looking at certain toughto-access markets, like low-income single-family residences or other smaller affordable multifamily housing space. For us, the solution lies in aggregation and standardization. We’re trying to make sure that the efficiency of doing that eliminates the brain damage one does working on these small projects. On the energy efficiency side, we are launching, in partnership with D.C. PACE, a lending tree type of platform where we’re aggregating the pipeline of projects. We occupy a unique position in the District where people come to us looking for something that will help them reduce their costs. Our efforts are to help reduce the transaction life cycles of both the supply and demand side of finance. MS. SLEEPER: I do also want to put in a quick plug about something that might be of interest in Virginia. I know that everyone views Virginia as the red-headed stepchild of this region for solar, and it is not everyone’s favorite project location. But there are some changes happening in the state. Just two days ago, the Attorney General’s Office, in a brief in one of the proceedings we’re in, said that PPAs are legal within APCo territories. So for those of you who engage in PPAs, I’d suggest that you again start looking at Virginia. There are opportunities that are opening up. MR. HINCKLEY: Thanks to all of our panelists for a great discussion. For more information contact Elias Hinckley at ehinckley@sandw.com or 202-775-1210.

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